Are Offshore Tax Havens Legit? The Panama Papers in Context

I have given several interviews recently on the Panama Papers and have expressed the view that very other than some electoral fallout for a few politicians, little seems to have flowed from the revelations. To try and give some perspective to my view, I have tried to collect together some facts to how that the offshore finance centres, formally known as tax havens, are in fact, in the main part, highly efficient and respectable.

For example, in most offshore jurisdictions, a person needs a licence to act as a trustee, whereas (for example) in many onshore jurisdictions there are no restrictions or regulations as to who may serve in a fiduciary capacity. Further, the leading offshore financial centres are more compliant with the Financial Action Task Force on Money Laundering’s recommendations than many OECD countries. It is generally much more difficult to open a bank account in an offshore centre than onshore.

A 2009 report by the highly respected organization Global Witness, entitled Undue Diligence – How Banks do Business with Corrupt Regimes concluded that plundered funds were more likely to find their way to onshore banks than to offshore ones.

Offshore centres act as conduits for global trade and ease international capital flows. International joint ventures are often structured as companies in an offshore jurisdiction when neither party in the venture party wishes to form the company in the other party’s home jurisdiction.

Frequently such choice are made because of the depth of professional skills concentrated in such jurisdictions. The Cayman Islands, is estimated to house about 75% of world’s hedge funds and nearly half the industry’s estimated over US$1.8 trillion in net assets under management. Bermuda, which is market leader in captive insurance domicile (depending on which figures you read) and is the third largest reinsurance centre in the world. The British Virgin Islands is renowned for speedy and accurate corporate formation and is home to 700,000 offshore companies. Guernsey is highly regarded for the provision of corporate back office services. Jersey has a particularly strong international banking and funds management sectors and has a high concentration of professional advisers including lawyers and fund managers.

Offshore financial centres are becoming increasingly important as conduits for investment into merging markets. For instance, 44% of foreign direct investment (FDI) into India came through Mauritius last year while over two thirds of FDI into Brazil came through offshore centres.